From the beginning of December 2013, Teekay Tanker (TNK) stock has surged by 31%. This rise in the stock has been associated with an improvement in the industry outlook and the company’s financials. This article discusses the positives and the reasons to believe that this 3.3% dividend yield stock is a good investment.

Positive First Quarter Results

Teekay Tankers reported an adjusted net income of $0.20 per share in 1Q14, compared to a net loss of $0.04 per share in Q113. More importantly, the company generated cash available for distribution of $0.36 per share, compared to $0.10 per share in Q113 and this translated into a dividend of $0.03 per share for the quarter.

The primary reason for strong results in 1Q14 is a high spot tanker earning for Suezmax and Aframax tankers since 2010 mainly as a result of higher crude oil imports into China, an increase in long-haul crude oil movements from the Atlantic basin to Asia.

With tanker day rates remaining firm, it is very likely that Teekay Tankers will continue to report strong results in the coming quarters. In order to gain from high spot market rates, Teekay Tankers is also strategically shifting its fleet employment to the spot market. It is very likely that the coming quarters will be stronger as a result of this shift.

Strategic Acquisition and Investment

Besides growing organically, Teekay Tankers has also embarked on strategic acquisitions and investments, which will generate strong long-term returns. With these investments coming at a time when the tanker market is on a recovery path, Teekay Tankers is doing the things right.

In the second quarter of 2014, Teekay Tankers agreed to acquire a 50% joint venture interest in Teekay Corporation’s commercial and technical management operations (Teekay Operations) for $15.6 million.

As a result of this acquisition, Teekay Tankers expects to earn approximately $2.5 million in additional equity income annually. Further, Teekay group entities and Tanker Investment have a contractual obligation to use Teekay Tanker’s operations to manage their conventional tanker vessels. This provides an additional revenue generation source.

In 2014, Teekay Tankers also acquired 6.5% equity interest in Tanker Investments, which is listed in the Oslo stock exchange after an IPO in March 2014. This investment serves as a source of liquidity and also has the potential to generate capital appreciation for Teekay Tankers.

Industry Outlook to Remain Positive

An improvement in the industry has result in a turnaround for all tanker companies. Nordic American Tankers (NAT), which offers a dividend yield of 10%, reported a positive quarterly net income for the first time in four years. The point I want to make is that the industry fundamentals have improved after a sustained downturn and the improvement is likely to continue given the factors below.

The first reason is the growing demand in China and Emerging Asia, which is likely to continue and increase with time. Record high crude oil imports by China of 6.6 million barrels per day during January 2014, and a greater volume of long-haul Asian crude imports from West Africa, led to an increase in crude tanker tonne-mile demand during the early part of the first quarter.

This trend is likely to continue with a margin decline in day rates in the second and third quarter of 2014 as a result of the seasonality factor. The supply of Suezmax and Aframax tankers is also low and this adds to the conviction that the day rates will remain firm. It is expected that the Suezmax and Aframax tanker fleets will decline in size during 2014-16 as scrapping is estimated to exceed new vessel deliveries. Therefore, the broad industry fundamentals are positive and should result in continued profitability and increased dividend payouts.

Conclusion

The tanker market is just at the beginning of the recovery path with the first quarter of 2014 signalling the beginning of the reversal. This is one of the best times to consider investment in the industry as the stocks trend higher from depressed levels.

Teekay Tankers is well positioned to benefit from the industry trend reversal with a strong fleet and some strategic investments. The stock, with a dividend yield of 3.1%, is a good buy at current levels with a medium to long-term investment horizon.

About the author:

Faisal Humayun

Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

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